#PICInquiry: Asset manager took a reckless, naked position on Lancaster deal

PRETORIA – Former executive head of risk and compliance at the Public Investment Corporation (PIC), Paul Magula, on Monday told the PIC Commission of Inquiry that the asset manager took a reckless naked position with regard to the Lancaster 101 transaction.

Lancaster 101 (Lancaster), is the black empowerment partner of embattled retailer Steinhoff International Holdings, owned by former trade unionist, Jayendra Naidoo. The deal Magula referred to, was completed just six months before Steinhoff collapsed.

Magula said the Lancaster transaction was approved without credit risk seeing the outcome of the internal audit report concerning the transaction. “That shows complete disregard for governance tools. R9.3 billion approved without considering risk opinion and now R5bn has been impaired as a result.”

He said Citibank would not lose a cent on Steinhoff funding: “Steinhoff will get their full R6.3bn provided for Steinhoff Africa Retail (STAR) funding, as the PIC covers them through subordination of security.

“Citibank took a commercial view, and PIC simply took a reckless naked position,” said the former head of risk at the PIC.

Magula was part of the PIC executive committee under the leadership of the then chief executive, Dr Daniel Matjila. He also formed part of all executive committees within the PIC, including, among others, the Portfolio Management Committee and the Information Technology and Risk Committee.

“Most discussions on Steinhoff where GEPF lost money, mainly focused on the listed side but never on the unlisted side where PIC gave R9.3bn to … Lancaster. The purpose of the financing was for Lancaster to acquire shareholding in Steinhoff International.

“When Lancaster approached the PIC, the shareholding was to be 100 percent to Naidoo. The shareholding was then changed and became as follows: GEPF 50 percent, Naidoo 25 percent and Community Trust 25 percent,” Magula said.

The Lancaster deal was done in two phases:

Phase 1: PIC to give Lancaster R9.3bn secured by both shares and full cover collar structure (insurance against share price drop). The PIC was supposed to be guaranteed capital return “if anything was to happen to the investment”.

Phase 2: Restructuring of the transaction wherein the PIC was to partially forego its security to another lender, Citibank, without getting paid for the subordination of security. Citibank funded Lancaster (empowering the same Naidoo) Investment in STAR to the tune of more than R6.3bn.

Magula said: “We considered the risk regarding the Lancaster transaction and restructuring too high due to the following reasons: The structure reflected and impairment on interest payable due to share price performance, reputational risk was considered to be very high, we did not find comfort on the downside protection of our loan to Lancaster and therefore PIC was taking and equity position in a loan structure without the upside.

“In a way, we felt PIC was naked because shares are not the best of security for debt”, he said.

Magula said after the Steinhoff scandal, PIC had to write off almost R5bn from one transaction.

He reiterated that the loss suffered, amounted to reckless investment decision-making to enrich one individual.

For the Government Employees Pension Fund (GEPF) the debt-funded exposure never made commercial sense. “No commercial bank would have funded with the same structure” said Magula.